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WHAT TAX DOES A FOREIGNER PAY IN SPAIN?

Speed up your business with these tips "What tax does a foreigner pay in Spain? Analyse and discover this TIP!

Do I really have to pay taxes in Spain if I am a foreigner?

Unfortunately, yes.

Of course, Spaniards living in the country have to pay taxes. But so do foreigners. And although there are There are important differences in the taxes to be paid depending on whether you are resident or non-resident, both tax residents and non-residents must pay taxes in Spanish territory.

However, the key here is to understand what your specific obligations are, and the different avenues available to optimise your situation and avoid overpaying (which, in many cases, is entirely possible).

So, if you are a foreigner living in Spain, carrying out any kind of economic activity in the country, or simply owning any kind of asset, you will have to pay taxes.

How does the tax system work in Spain?

Understanding how taxes work shouldn't be that complicated, and this TIP shows you how. Unlike in many countries (e.g. the UK), the Spanish fiscal year runs from January to December, coinciding exactly with a calendar year.

This simply helps us to understand the duration of the different tax obligations that will arise depending on what you generate in the country and your particular situation.

WHAT DOES THIS MEAN?

All tax liabilities arising from 1 January to 31 December are grouped together, and you will have to declare and pay them during the following year. This is done through your annual tax return, known as the IRPF income tax return.

When, then, should we pay our taxes?

Your taxes are filed between 1 May and 30 June next year. In other words, we will always file, in the current year, the previous year's taxes. However, if you earn less than 22,000 euros a year and that money comes from a single payer (say, a company), you do not have to file this tax return.

To make the payment, you will need to be identified in the eyes of the administration. This means that you will need your NIE number, the basic number that identifies you as a foreigner and that you will need for almost any legal procedure. All matters relating to taxation in Spain, both for residents and non-residents, are regulated by the Spanish Tax Agency, the institution to which you must pay your taxes.

If you want to be up to date with all the latest tax updates, we strongly recommend you to visit their website, as they frequently publish the latest updates and all the forms and documents you will need to use.

Are you resident or non-resident in Spain for tax purposes?

To determine exactly what specific taxes you will pay in Spain as a foreigner and how much you will pay, you first need to know whether you are tax resident or not. This distinction, as mentioned above, is purely fiscal in nature, and has nothing to do with the residence permit (see TIP) that you may have to live legally in the country.

For example, you may be the holder of a residence permit (e.g. a Golden Residence Visa), but for tax purposes you are considered a non-resident because you do not meet the requirements.

SO HOW DO I KNOW IF I AM A TAX RESIDENT IN SPAIN?

YOU WILL BE CONSIDERED A TAX RESIDENT IF YOU MEET ONE OF THE FOLLOWING THREE REQUIREMENTS:
  1. You live in Spain for more than 183 days per year (note that the days do not have to be consecutive to count as effective).
  2. You have economic interests in the country, which means that you carry out your professional activity in Spain, either working for a company or working on your own account (entrepreneur). 
  3. Your spouse and/or children live in Spain.

Full list of taxes in Spain for foreigners

Now you know that you have to file your tax return every year, and that you will have tax obligations regardless of whether you are resident or non-resident.

BUT WHAT EXACTLY ARE THESE TAX OBLIGATIONS, AND HOW DO THEY DIFFER DEPENDING ON WHETHER I AM A RESIDENT OR NON-RESIDENT?

INCOME TAX (IRPF)

Personal income tax (IRPF) is levied on the income you earn in the country. But; What can be considered as income for income tax purposes?

BASICALLY:
  • The salary you get from working for a company or what you earn as a self-employed person through your invoices.
  • Capital gains arising from, for example, dividends or interest
  • Pension contributions and benefits
  • The income you earn from renting a home
  • Gains generated from the sale of real estate, andtc.

All such income will be subject to income tax and should be included in your tax return.

In addition, if you are considered a tax resident in Spain, you will have to pay income tax on all income and gains you have generated worldwide (not only in Spain).

HOW MUCH EXACTLY SHOULD I PAY?

That will depend on the exact revenues it generates worldwide.

THIS MEANS THAT THIS TAX IS PROGRESSIVE AND WORKS AS FOLLOWS:
  • Below the first €12,450 you earn, you will pay 19% income tax.
  • From €12,450 to €20,200, you will owe the Spanish Tax Agency a 24%.
  • From €20,200 to €35,200, 30%.
  • From €35,200 to €60,000, 37%.
  • And above €60,000, a 45%.

However, bear in mind that this is a general rule, and the final percentage you will end up paying depends largely on your particular situation. Depending on the autonomous community in which you live, the brackets vary, and the percentage of personal income tax is also calculated differently depending on your age, whether you have children or many other personal factors.

Moreover, unlike in the case of non-residents, in this case you can have personal deductions and allowances.

SOCIAL SECURITY PAYMENTS AS A FOREIGNER

As a foreign worker, you will have to contribute to the Spanish social security system, unless you receive a certificate of coverage from your home country. This leads us to understand how income tax is actually paid.

If you work for a company, you receive your salary at the end of each month. This salary is made up of a gross amount and a net amount (the net amount is the amount you finally receive and see in your bank account).

WHAT IS THE DIFFERENCE?

From your gross salary, the company that hired you pays monthly social security contributions and personal income tax on your behalf. This way, normally, when you do your tax return in June, you don't have to pay extra, as the company has been deducting it throughout the year and has paid it for you.

But what if you are self-employed? In that case, you will pay an income-related social security contribution every month (although you may decide to pay extra to get a better pension in the future). For the first two years you can benefit from the flat rate of 80 euros (see+ TIP).

Finally, note that a big difference arises here as regards taxes paid by non-residents and residents. For social security contributions are deductible for residents, but not for non-residents.

DOUBLE TAXATION TREATIES TO AVOID OVERPAYMENTS

Suppose you are a tax resident in Spain, but you also earn income abroad, for example in the USA.

Of course, you will pay tax in the United States, since you are generating that income there, but as we said, being a tax resident in Spain implies paying tax on your worldwide income, so would you end up paying IRPF twice for the same amount generated, but in two different countries?

Fortunately, the answer is no, thanks to what are called double taxation treaties. Spain has treaties of this type with many countries so that you only have to pay tax once on the same income, and you can find out if your country has one here.

TAXES FOR NON-RESIDENTS: IRNR

If you are a non-resident for tax purposes, but you have a property in Spain or any other type of asset that generates income, then you will have to pay non-resident income tax. Thanks to double taxation treaties, this non-resident tax will only apply to property and companies in which you are a shareholder.

This tax rate will be 24% on income if you are a non-EU citizen, and 19% if you are an EU citizen. Suppose, for example, that you live in the UK, but you have a house in Spain, and you rent it all year round.

You will then be taxed under this IRNR for all the income you generate through the rental, with the negative that you cannot deduct any associated expenses (unlike residents).

AND WHAT HAPPENS IF YOU DON'T RENT IT AND YOU HAVE THE HOUSE EMPTY UNTIL THE SUMMER, WHEN YOU VISIT THE COUNTRY?

Unfortunately, in that case you will have to pay the same tax taking into account the amount you would have paid if you were renting. That is, 24 or 19% (depending on your country of origin) applied to 1.1% or 2% (depending on when the value was computed) of the cadastral value of the property.

WEALTH TAX

Do you own property in the country? Then you will have to pay wealth tax, regardless of whether you are considered a tax resident or not. And we are not only talking about property or assets in Spain, wealth tax applies to assets worldwide if you are a tax resident.

Wealth tax is levied on assets such as investments and savings, real estate properties and investments, cars, boats, art pieces... assets of this type. But don't panic: this tax applies only to highly valued assets. This means that you have a personal allowance of €700,000 (€500,000 in Catalonia). 

Moreover, if we are talking about your property where you usually live, you will have an additional subsidy of €300,000. If you own assets of less than this value, you do not have to worry about Spanish wealth tax.

But let's assume that you do. For example, it is the case that you own a property valued at €1.5M. How much would you have to pay then? The wealth tax ranges from 0.2% to 2.5%. But it will only be levied on the value of the property exceeding the applicable allowance. Again, this is a progressive tax: the higher the value of your assets, the higher the tax rate.

You should take these percentages only as a general rule, as they may be higher depending on the region where you live. In addition, the bonuses also vary according to the Autonomous Community. Thus, we find places such as in Madrid where the rebate is equivalent to 100%, which means that there is no need to pay wealth tax. 

HOW TO REDUCE THE PAYMENT OF WEALTH TAX?
THERE ARE TWO MAIN WAYS IN WHICH YOU CAN REDUCE THE TOTAL AMOUNT OF MONEY YOU HAVE TO PAY IN TERMS OF WEALTH TAX AS A FOREIGNER:
  1. Firstly, although not many, certain assets may be excluded from this tax.
  2. Secondly, by restructuring your investments, you may be able to reduce the applicable percentage.

How can this be achieved? If you want to determine exactly how to reduce the total amount to be paid, saving money, do not hesitate to contact us, as this is a very specific situation that we need to analyse meticulously together. 

INHERITANCE AND GIFT TAX IN SPAIN

WHEN SHOULD YOU PAY INHERITANCE AND GIFT TAX IN SPAIN?

This tax is paid by the individual who accepts any given asset (the beneficiary) granted as an inheritance. Applying the basic theory to the taxes that an expatriate must pay while living in Spain, we must consider two situations in which this tax will be due.

Firstly, if the asset is in Spain, regardless of where the beneficiary lives, he or she will have to pay Spanish inheritance tax. In addition, the opposite situation also holds; whereby, if the beneficiary lives in Spain, regardless of where the asset is held, inheritance tax will also be payable.

The exact amount will depend, once again, on the region and municipality you are in. This means that you will not pay the same in Catalonia as in Andalusia.

CAPITAL GAINS TAX

And what if you sell a property in Spain or shares in a company? In that case, and again, taxes. If you are a tax resident in Spanish territory, you will have to pay between 19 and 23% tax on the profit made on the sale of the property or shares.

Can anything be deducted from the total amount? Well, if you are a resident, good luck: you have a number of allowances and exemptions that you can take advantage of. This means that you may not even have to pay this tax.  But if you are a non-resident... then you can only deduct the costs of the lawyer who handled the transaction, the notary, and the agency. 

In addition, as a non-resident living outside Europe, the tax rate here will be 24%. However, if you are resident in Spain for less than 183 days a year but live in another EU country, you will pay only 19% in this tax.

TAX WHEN BUYING A HOUSE

FINALLY, THERE ARE THREE DIFFERENT TYPES OF TAXES YOU WILL PAY IF YOU BUY A PROPERTY IN SPAIN, DEPENDING ON YOUR SITUATION:

Transfer tax, a progressive tax levied on second-hand properties. It varies from 8 to 10% on the agreed sales price. For those buying a completely new house or flat: VAT (which will generally be 10%) and stamp duty (1.5% in Barcelona).

VAT (VALUE ADDED TAX) 

Finally, there is this consumption tax, called VAT. It's the same tax you'll already find applied to any product you buy in a supermarket, or the extra you pay when you hire a freelancer or service provider to do a job for you.

The standard VAT rate is 21%, but there is also the reduced rate of 10%, the super-reduced rate of 4%, and there are some products that do not apply VAT (0%) as they are exempt, such as educational courses and training.

PERSONAL DEDUCTIONS

If you are a tax resident in Spain, you can benefit from different allowances and deductions that will reduce the total amount to be paid in your tax returns.

WHAT ARE THESE BONUSES?
  • Money you donate to a government-recognised NGO.
  • Pension plans and contributions, up to 2,000 euros per year.
  • Rent or mortgage payments as long as the contract dates from 2014 or earlier.
  • Personal allowance of 5,500 euros for those under 65, 6,700 euros for those between 65 and 75, and 8,100 euros for those over 75.
  • Additional bonuses depending on your Autonomous Community.

For example, in Catalonia there are allowances for the first year after the birth of your children, if you become a widow or widower, etc.

START OPTIMISING YOUR TAXES NOW

Now you know what are the different taxes that expatriates must pay in Spain. As you can see, there are several differences derived from the fact of being a tax resident or not, and many ways to optimise the total amount to be paid.

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